How This Retailer Is Proving That Dollars Do Grow on Trees

Deep discount retailer Dollar Tree (NASDAQ: DLTR) is growing like a weed. Wall Street hasn't paid much attention to its exciting growth, but that's finally starting to change. Dollar Tree is slowly getting the credit it deserves for posting strong results in a challenging environment for retailers over the first half of the year.

For now, Dollar Tree's stock is almost as cheap as its products, but that might not last for long. The company is racking up impressive growth, expanding its store count, and buying back boatloads of stock. It, along with close competitor Dollar General (NYSE: DG) , are great examples of two retailers that are simply firing on all cylinders.

Money does grow on treesDollar Tree just posted record first-quarter results. In all, its same-store sales growth, or growth at stores open at least one year, clocked in at 2%, and it also reported 7% growth in net sales. This is impressive, especially considering how weak the first half of the year has been for retailers more broadly.

That's because American consumers remain cautious about their total spending, which means there's only so much cash to go around for retailers these days. In addition, the brutal winter weather that persisted well into the traditional spring months took a bite out of growth.

Add it all up, and you'd naturally assume all retailers would suffer with these headwinds. Not Dollar Tree. It's still growing sales, thanks to its focus on customer service and effective pricing. Also, thanks to huge share buybacks, it's juicing its earnings growth even more.

Dollar Tree bought back $1 billion of its own stock over the past year, and has another $1 billion remaining in its current share repurchase authorization. The benefits of such aggressive buybacks were plain to see in the first quarter, since earnings per share jumped 13%.

A close peer in the dollar-store space, Dollar General, is due out with its own first-quarter earnings report on June 3. It will likely have good things to say as well, since it's been highly successful recently just like Dollar Tree. Dollar General racked up impressive 9% sales growth and 3% comparable-sales growth last year, along with 10% growth in earnings per share. Also, Dollar General returned $620 million to shareholders last year through share buybacks.

The good times should continueTo reflect their success, both Dollar Tree and Dollar General have ambitious growth initiatives involving new locations and expanding square footage. Dollar Tree opened 94 new stores in the first quarter alone. For its part, Dollar General opened 650 new stores last year and plans to open 700 additional stores in 2014.

This will help boost their total sales growth, and sales at existing stores should continue to do well for a very fundamental reason. Cash-strapped consumers in the United States, are still scaling down their spending habits. That's resulted in increased traffic at dollar stores like Dollar Tree and Dollar General.

Once those shoppers are in the door, they clearly connect with these stores' pricing strategies and product offerings, since average tickets for both stores are increasing as well. Dollar Tree noted that its average ticket size rose in the last quarter, and its discretionary business is growing faster than its consumables business.

Dollar Tree or Dollar General: Why not both?It's a natural reaction to pit two rival dollar stores against each other, but the reality is that both Dollar Tree and Dollar General are doing very well. They're both growing and buying back lots of stock to create even more value for shareholders. As an added bonus, neither stock is expensive.

In fact, both Dollar Tree and Dollar General look cheap. Their valuations are about on par with the market, which seems too conservative considering their growth potential and cash generation. At least in the deep-discount space, there's plenty of room for both Dollar Tree and Dollar General to thrive.

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While fully valued currently @ $54.32 (June 2014) the future prospects for DLTR forecasts by analysts expect it to grow intrinsic value by a whopping 38% (www.skaffold.com). DLTR ranks as an A1 investment grade business in Skaffold, has a low net debt/equity ratio of only 28% and an excellent Return on Equity (ROE), which I find is an excellent indication, currently at 37% and expected to be 35% and 29% respectively in 2015 and 2016. These are exceptional ROE figures with most value investors happy to jump into most stocks with an ROE of 15%.

Overall DLTR looks like a sound investment with good future prospects and a good long term buy.